Guest Voices: One wrong digit could nix your tax refund

K. Andy Tiwari is principal and named partner of Tiwari + Bell PLLC.

Photo: Courtesy photo

Delayed tax refunds and false tax returns are common problems. But your tax refund also could be delayed — or even permanently misrouted — if you’re off by just one digit on the account number provided to the IRS. This also could hold true for other “Automated Clearing House” deposits, though the focus of this article is on tax returns.

Using the right account number is simple enough, right?

Actually, people erroneously enter account numbers with some frequency, and it’s not hard to understand why: Our attention is often diverted by other activities, and we store various numbers in our heads.

With large financial institutions, a difference of one digit in a sequence could be the difference between your account and someone else’s. This means that your deposit inadvertently could be placed in another account.

But surely a bank would catch the error if the name and account number don’t match? Under the operating rules for the ACH system and according to guidance from the U.S. Bureau of Fiscal Service, a receiving bank is entitled to rely on the account number in ACH transactions and isn’t required to verify that the account holder’s name and account number match on a deposit.

Given the sheer number of ACH transactions that take place daily (22 billion electronic payments were made in 2012, according to the National Automated Clearing House Association), the reasoning behind the rule is that requiring such analysis would slow the process and be burdensome on the institutions involved.

So what happens if you provide the IRS the wrong account number on your tax return? If the transaction results in an error and no deposit, you might be in luck. But if the funds are deposited into another account, getting your money back probably will require a lawsuit.

The IRS specifically states that if your refund is deposited into someone else’s account because you entered a wrong number, you must work directly with the receiving bank to recover your funds. The IRS can issue a trace to see where the money went, but the bank is not obligated to return the funds, and the IRS can’t force the bank to do so.

Financial institutions are not liable for a misdirected refund because of taxpayer error (or even an IRS error, though the IRS can be held responsible for that). If the bank notices an error, the bureau says, a financial institution is “encouraged” to return the misplaced funds to the IRS. But that’s only possible if funds are still in the account.

If you catch the problem quickly, you can convince the receiving financial institution to “freeze” the funds. However, if the receiving account holder isn’t honest and willing to return the funds, or claims the funds lawfully belong to him or her, you may have no choice but to sue that person and the bank.

In most cases, the bank will “interplead” and deposit any disputed funds with the court for safekeeping. In Texas, the bank will be entitled to recover its attorneys fees and costs for the legal proceeding and can recover those sums from the deposit. Ultimately, you will have to use the legal system to prove that you’re entitled to whatever funds remain.

If the other party has fled with the money, it might be more cost-effective to just write off your mistake.

Sometimes you might not be the source of the error, but the same problem could result. Recently, a newspaper in Baltimore reported that a woman is fighting to get her $1,000 refund back after her money was deposited into the wrong account, possibly because of faulty tax-preparation software. Her financial institution didn’t want to write the account holder whose account had received the funds, and the state’s comptroller’s office that originated the refund wasn’t of any help. The other account holder already had withdrawn the money and disappeared.

Bottom line? It’s worth double-checking to make sure the correct number is on your tax paperwork or other financial account deposit papers. Of course, get legal help early if you catch a mistake.